February 16, 2006

A few Kingfishers and McKinsey's take on BPO

Day 2 at Nasscom after a late night of meeting and greeting, food and drink, and then more food and more drink. At the CEO breakfast, Noshir Kaka, a Partner in McKinsey’s Indian practice promoted their work in business process benchmarking and talked through how the dimensions of process operations vary significantly between best in class companies and average ones. (I knew I shouldn’t have had that last Kingfisher before bed).

Some key nuggets in his talk included the misalignment between the client’s objectives in outsourcing and the service providers’ objectives in taking on the service, despite the rhetoric of ‘partnership values’ and common goals. Best in class service providers operate at significantly lower cost and up to three times greater productivity than other competitors, in Noshir’s view due to underlying process skills rather than domain expertise. Incidentally, this is exactly the view Xansa developed some time ago when we showed one of our prospective clients (a utility), how similar the process characteristics of the ‘chargebacks’ service we are providing to a major credit card company were to the utility company’s ‘billing exceptions’ process..... in other words, the ‘skills versus process’ debate covered this morning by McKinsey.

Another fascinating point that came through was in the ‘captive’ versus ‘provider’ debate and McKinsey’s conclusion that captives incur between 30% and 50% higher costs than outsourcing through an external service provider - and the captives view that this cost premium is worth it to offset risk. Hmmm, personally not convinced..... interestingly, he continued their findings: whilst a combination of cost and quality and risk contributed 70% to the client’s concerns when they first started offshoring business processes, these concerns declined considerably once the process had been in offshore delivery for several years. Then the concerns shifted to continuous innovation, speed and flexibility. Not rocket science, and a fairly natural response to doing things differently, but a consistent theme according to Noshir. Incidentally, he also reported that shortly after offshoring, clients feel that innovation drops across the board when compared to the way their previous in-house operations ran. The McKinsey work on benchmarking is continuing and the next major phase will apparently publish in December 06.

Incidentally, I have managed to outsource some of the sessions today (there are several parallel tracks) to a couple of my colleagues. I’m initially concerned about quality of reporting, but not so much about cost - i’ve managed to negotiate excellent terms, a couple of Kingfisher’s each. Innovation will no doubt be my next worry too.